The Powers of Fossil Fuels, an Update with Data per 2017

This post is an update and small expansion of The Powers of Fossil Fuels spanning more than two centuries of the history of the world’s energy, primarily fossil fuels (FF), consumption.

Between 2002 and 2017 world energy consumption grew with about 39%, world Gross Domestic Product (GDP) by 130% and world total debts by more than 160% (market value and expressed in US dollars).

The narrative of the growth story of the world economy (GDP) appears as a rule to leave out two participants:

DEBT and the accelerating debt growth since the 1980’s, more notably since the start of this millennium and how this unprecedented growth in total world debt helped pull forward ENERGY demand.
Post the Global Financial Crisis (GFC in 2008/2009) the continuity of economic growth became facilitated by concerted policies by the world’s major central banks by their low interest policies and Quantitative Easings (QE).
Lower interest rates allowed room for more DEBT on most balance sheets and growth in total DEBT is important for continued economic growth.

ENERGY (and primarily FFs) consumption and its strong growth facilitated by the rapid growth in DEBT.

Simplistic explained is GDP a monetary measure of the annual volume of transactions.
These transactions involve the exchange of products and services which require some input of ENERGY and in recent years growing amounts of DEBT allowed for this to happen.
This illustrates that money/currency is a claim on ENERGY.
The orderly retirement of the growing DEBT is a claim on future ENERGY.

This post also takes a brief look at the recent years’ growth in solar and wind (renewables, RE) and how their growth measured up against FFs since 1990 and Year over Year (YoY) changes for FF and RE since 2000.

Figure 1: The chart shows the developments in total world energy consumption split on sources as of 1800 and per 2017.Energy sources are stacked according to when these were introduced into the world’s energy mixture.The black line (plotted versus the left hand scale) shows development in the world’s GDP in current US dollars since 1980 based on data from the International Monetary Fund (IMF).

In the early 1800s biomasses (primarily wood) were humans’ primary source for exogenous energy. Coal was gradually introduced into the energy mixture after the successful development and deployment of the steam engine which gave birth to the Industrial Revolution. Coal is a nonrenewable, abundant and a denser energy source than wood.

The growing use of biomasses had led to deforestation in those areas serving energy intensive industries like mining and metals.

The steam engine and its use of abundant coal as an energy source made it possible to rapidly expand the industrial production, create economic growth and thus the Industrial Revolution was made possible by fossil fuels.

With the most recent discoveries and introduction of fossil oil and natural gas there appeared to be several abundant sources of volumetric dense energy that could entertain exponential debt fueled economic growth.

Fossil fuels represent natures’ legacy stock of dense energy (ancient sunlight) that during some decades has been subject to an accelerated depletion.

Several reports in the media may now leave the impression that we are at the threshold for a smooth transition from FFs to RE (solar and wind).

How does this measure up against hard data forRE (solar and wind) versus FFs?

Figure 2: The stacked areas in the chart above show the developments in the world’s consumption (production) of energy from the renewables (solar [yellow] and wind [turquoise]) from 1990 to 2017.

Renewable energy is in a thermodynamic sense a misnomer.
A more precise description would be rebuildable energy harvesters and converters.

World energy consumption from solar and wind was about 2,4% of world total in 2017.

There is no doubt that renewable energy will have a role in our future, but the extent of its role is subject to much (heated) debate. For those that closely have followed my posts (here at Fractional Flow) will have found that I focus on some recurrent themes; oil (FF) prices/costs, growth in world total debt levels, interest rates, consumers’ affordability, fossil fuel companies’ financial health, central banks’ policies (most important the Federal Reserve Bank [FRB]), fiscal policies and some more.

By carefully studying the recent years growth in installations and consumption of RE (solar and wind) one can observe that their growth coincided as the world’s total debt grew strongly as interest rates were lowered and kept low (to allow for growth in total debt) and some governments allowed for competitive advantages for RE.

Despite all the technological improvements for RE that has brought their costs down (and further improvements are likely to follow), RE are, like FFs, also at the mercy of consumers’ affordability; that is the consumers’ ability to continue to access more and cheap credit/debt.

Figure 3: The chart above shows the stacked development (growth) in the world’s consumption of fossil fuels (oil [green], natural gas [red] and coal [dark grey] versus the growth in renewables (solar [yellow] and wind [turquoise]) also stacked, since 1990 to 2017.

The chart shows that after the collapse of the oil and natural gas prices in 2014 (refer also figure 5) there was some substitution of natural gas for coal.

By comparing the growth between FFs and RE, it demonstrates how dependent our economies, our wealth and well beings are upon FFs. Looking at the growth in total FFs versus RE consumption since 1990 we should now ask ourselves if we truly are prepared to wean ourselves completely of FFs and transition into a life based on an energy budget made up from only RE (refer also figure 1).

In 2017 about 19% of the world’s total energy consumption came from biomasses, hydroelectric, solar, wind and other renewables.

The accelerated growth in fossil fuel and renewable consumption (as of 2002) happened as the world, led by China and the US, accelerated its growth in debt, refer also figures 6 and 7.

Debt allows for energy consumption to be pulled forward in time and (temporarily) pay for costlier energy.

Figure 4: The chart above shows Year over Year (YoY) changes in total global consumption of fossil fuels [grey] versus renewables (solar and wind [light green] since 2000 and per 2017.

With the global financial crisis (GFC) FF consumption declined in 2009. It came back with a vengeance in 2010 as primarily China and later the US embarked on an unprecedented growth in credit/debt, refer also figures 6 and 7.

Following the oil price collapse in 2014 prices for all FF’s came down (refer also figure 5) as did the YoY growth in FF consumption.

The higher YoY growth in FF consumption since 2016 was likely encouraged from lasting, lowered FF prices. However, growth in FFs was pronounced lower than in the previous years (exception being 2009).

During 2016 and 2017, and in absolute terms, FF consumption has grown faster than RE.

RE continued to grow much helped by lower system prices and low interest policies.

With the oil price collapse the US dollar strengthened versus several currencies like Euro and British Pounds which offset some of the price declines for FFs for several net importers of energy.

The speech “Growing, Fast and Slow” given by the Chief Economist of Bank of England (BoE) in 2015 mentions the steam engine and the Internal Combustion Engine (ICE) as participants for economic growth and energy is only found in the term “cognitive energy” on page 12, and this is not in relation to physical energy.

In the story of economic growth (GDP) from BoE the strong growth in debt has also not been mentioned.

Is Growth In The World’s Total Debt Widely Recognized For Its Role In The GDP Growth Story?

Figure 6: The chart above shows the growth in the world’s total credit/debt for ALL sectors (financial, private and public) split on Mature Markets (MM)-ex USA, USA, Emerging Markets (EM)-ex China and China.

Note from figure 1 that world GDP had a high in 2014 which declined noticeably in 2015 and this happened with significantly lower energy prices. The lowered wholesale energy prices does not fully account for this GDP reduction.

For the period 2002 – 2012 world energy consumption grew about 3 150 MTOE/a, while world total debt grew by about $120 Trillion. There can be no doubt that this growth in debt made possible the growth in energy consumption and provided some ease in a period with higher energy prices.

The collapse in energy prices from 2014 to 2015 provided some tailwinds to the world economy in 2015.

In 2016 and 2017 it took the addition of $4 – $5 of credit/debt to create $1 of additional GDP for the 43 economies (now represented in the BIS data) that made up more than 90% of the world’s GDP.

The oil price (Brent) increased from $44/bo in 2016 to $54/bo in 2017.

Figure 7: The chart above shows Year over Year (YoY) changes [growth] in total private and public credit/debt in China (red line), US (blue line) and the total for these two (black line) from Q1 2000 to Q4 2017.

In recent years credit/debt growth in China and USA was the main drivers of world economic growth and allowed for growth in energy consumption and helped negate higher prices. At some point in time the balance sheets for these economies will reach their limits for credit/debt.

The chart illustrates that China’s considerable increase in credit/debt creation from 2009 (when China surpassed US as the world’s biggest credit creator) made a major contribution to bring the global GDP growth back on its trajectory post the Global Financial Crisis (GFC) in 2008/2009.
China and its total credit creation in 2017 likely contributed its fair part in lifting the oil price about $10/bo from 2016 to 2017 as the oil market was on its way to rebalance, following the agreed supply cuts by OPEC and some cooperating nations and implemented as from the start of 2017.

How much room there is now left on the world’s balance sheet for further credit/debt expansion is anyone’s guesses.
Lower interest rates, expands the balance sheet and higher interest rates shrinks it.

At some point in time and for whatever reasons or combinations thereof there will be no more room on the global balance sheet.

4 Responses

Hi Rune,
I much appreciate your analysis and the wealth of details you emphasize in your article.
No doubt, the global financial situation is a matter of concern and to-day politics in some important places make it worse. Fossil fuels are in irreversible depletion and their extensive use endanger the climate stability on Earth. As for economic stability, the events 10 years ago, fossil fuels price spike and the subsequent financial crisis are a reminder of possible imminent dangers in the near future. Worse than in 2008, the financial easing in US is already used now for political convenience, leaving no room for maneuver in the event of an economic downturn.
But I try to remain optimist. In the dark surrounding, an increasing source of light may be noticed ( It’s a good ambivalent metaphor as it includes solar energy … ). The renewable energy is shining exponentially, doubling in quantity every 2.5 years or even faster. Of course, exponential trends are only for short times. But let’s suppose for a moment that this trend continues for 10 more years. The 350Mtoe of annual renewable energy (only wind and solar energy) in 2017 would increase in 2027 16 times to 5600Mtoe, more than to-day coal usage. Does it sound as crazy prediction? Some would argue that expensive and intermitent PV or wind is no match for cheap coal base-load for power generation. But this seems to be no longer true. The paradigm is changing. There are sources citing bids for large PV farms for less than 30$/Mwh power generation, possibly supplemented by large battery energy storage , even that for less than 30$/Mwh power storage. That means less than 0.06 $/kwh. It seems to be already competitive in the electric energy generation.
See:
By the way, I don’t agree with Tony Seba prediction of future oil equilibrium oil price of 25$/barrel in 2030,
made after 46′ in the recording. With depletion and constrained higher prices, I would guess a price close to 100$/barrel.
Otherwise, I have a hard time finding essential flaws in his presentation.
Best regards,
Alex.

First of all I am not fully on-board the train of thoughts that the financial crisis in 2008 was triggered primarily by the preceding years strong growth in the oil price culminating by the spike in 2008.
The growth in the oil price was a contributing factor, but from what I have learned it was financial instability from (over)leverage together with tightening credit [trust {and also fraud} is a key word here] that was the primary underlying cause, and much like a snow avalanche waiting to happen it is hard to identify the snowflake that sets it off.

I believe in focusing on positive things and stay content with what one have and (quietly) build resilience for what might happen.
Yes, the growth in renewables is encouraging. However it is difficult to project the future trajectory for renewables as I see this in connection with FF prices, access to credit, interest rates, balance sheets, capacities to continue deployment of renewables to name a few of the variables in an equation that expects Business As Usual.

I would wrt renewables focus to understand the probabilities and effects of continued world debt growth in what appears as a changing paradigm. There are regional differences here.

I do not see the oil price sustained at $25/bo for multiple reasons, primary of them being how that would affect current extraction (oil with total operating costs below $25/bo would be shut down (and a big portion of the world’s oil production now needs $25/bo just to continue to flow) and this would also dramatically reduce the CAPEX for exploration and developments for new capacities. A sustained oil price of $25/bo would also cause a dramatic restructuring of the oil and service companies’ debt which again would spill over in the financial system.
In such a scenario OPEC and potential cooperating oil producers would also step up to tighten the spigots in an effort to establish a higher floor for the oil price.

At the other end I have a hard time to see that consumers (which now has increased leverage [tighter balance sheets] also with the effects from higher interest rates and more hikes projected) sustainably can support an oil price at $100/bo (todays $value and just using a round number).
The world’s total debt levels now and realistic possibilities for further expansion [Year over Year growth] of these are IMO the important quantity to keep an eye on.

Correlation is not necessarily causation.
There is no doubt that oil (energy) price shocks that is; a significant and lasting increase [over a short period] in oil/energy prices constitutes headwinds for consumers. (Not so much for net exporters of energy).
I would look at the cumulative effects of price changes over say a rolling 12 month period.

Looking at the oil price in terms of $2017 Brent was about $86/bo in 2007, $111/bo in 2008 (and dropped to about $70/bo in 2009) and $121/bo in 2011, $119/bo in 2012, $114 in 2013, $102 in 2014 and the period 2011-2014 is the longest period with the oil price above $100/bo [$2017] and world GDP grew from $73,2T to $78,7T.

So the world could sustain a+$100/bo oil price during 2011-2014 and no recession (world wide). That should trigger a search for reasons why.
That tells me something else was dominant in the 2008 crash.

Everyone has some model and/or reasoning for the future structural level of the oil price. I believe we are headed into some different territory and would follow developments in consumers’ affordability (ability to support lasting higher oil/energy prices), world total debt levels, interest rates, changing demographics to name a few parameters that affects demand.
A good identification of future demand developments is IMO key to make good projections (next 2-3 years) on the oil (and other energy) prices.